HQ 113046 - Vessel Repair; Application for relief; M/V LIBERTY SPIRIT, Voyage 27; Entry No. C53-0028012-6; United States Parts; Inspection; Staging; Segregation of Costs; Survey; 19 CFR 4.14; 19 U.S.C. 1466; 19 U.S.C. 1466(d)(2) - United States International Trade Commision Rulings

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HQ 113046

June 6, 1996

VES-13-18-RR:IT:EC 113046 PH

CATEGORY: CARRIER

Port Director
U.S. Customs Service
423 Canal Street
New Orleans, Louisiana 70130
ATTN: Vessel Repair Liquidation Unit

RE: Vessel Repair; Application for relief; M/V LIBERTY SPIRIT, Voyage 27; Entry No. C53-0028012-6; United States Parts; Inspection; Staging; Segregation of Costs; Survey; 19 CFR 4.14; 19 U.S.C. 1466; 19 U.S.C. 1466(d)(2)

Dear Sir:

This letter is in response to your memorandum dated March 16, 1994, which forwarded for our review an application for relief from duties relating to the above-referenced vessel repair entry. Our ruling follows.

FACTS:

The vessel LIBERTY SPIRIT, a United States-flag vessel owned by Liberty Shipping Group Limited Partnership and operated by Liberty Maritime Corporation, arrived at the port of Houston, Texas, on June 14, 1993. A vessel repair entry was timely filed (June 14, 1993, according to Customs records). According to the vessel repair entry and other documents in the file, the vessel underwent certain work at the Lisnave shipyard in Lisbon, Portugal.

On July 12, 1993, the vessel operator submitted an application for relief from vessel repair duties (dated July 8, 1993) regarding this entry of the vessel. The applicant claimed that certain items (identified in the application) were non-dutiable. You requested that we review certain items in the entry and provide you with our determination as to the dutiability of those items. Those items, with descriptions and other information from the invoice and other materials in the file, are listed below: Item no. Invoice description, etc.

103 Sea chest survey. This item consists of scaffolding necessary to open the sea chests for American Bureau of Shipping (ABS) and United States Coast Guard (USCG) inspection, high pressure washing of the sea chest area to allow proper surveying, reinstallation of strainers in good order, "renewing any defective fastenings", suctioning, and certain scraping. The costs are segregated as follows: opening and closing for survey $1,360; cleaning by scraping $180, and staging $540. The applicant does not request relief for the scraping portion of this item.

104 Zinc replacement. The invoice states that this item was canceled, cites order no. 16, and describes the work as consisting of covering with grease 30 anodes and the cleaning of the grease upon completion. The costs in this item are not segregated. The applicant does not request relief for this item.

330 Main engine sump cleaning. This item is described as inspecting and cleaning of the main engine sump, including removal of 6 manholes for access, pumping down of oil (by the vessel's crew) to a holding tank, cleaning the sump, wiping down with lint-free rags, notifying the Chief Engineer prior to closing for his approval, installing manhole covers with new gaskets, and surveying. The costs in this item are not segregated. The applicant does not request relief for this item.

ABS "dry- This item consists of five parts of a survey docking" performed by ABS. The five parts are: survey dry-docking survey, intermediate survey, special continuous survey (hull No. 2), special continuous survey (machinery & electrical equipment), and "repairs". The "repairs" survey (ABS Report LB 7225-E) refers to repairs to identified cargo holds, identified wing tanks, the rudder blade, and the main engine bracing system. The "repairs" survey describes the repairs made and inspection of the repairs afterwards finding the repaired articles in good order. There is no indication in the ABS Surveys that the surveys, other than the "repairs" survey, were performed to ascertain the extent of damages sustained, whether repairs were necessary, or to inspect repairs made. The invoices for the ABS surveys segregates the cost of the surveys of "repairs, tank cargo h. dmn. eng. [and] the bracing system" from the cost of the other surveys. The applicant first states that
"[a]ll the ABS Survey costs are claimed as exempt from duty" but then appears to concede that the cost of the "repairs" survey, per the ABS invoice, is dutiable.

5423661 Jotun Valspar Marine Coatings. The customer invoice for this item lists paints and marine coverings, as well as related items (cleaner and thinner). Also in the file is a shipping order form for the same material. According to the customer invoice, the material was sold to the applicant and shipped from Louisiana on April 8, 1993, to the vessel, care of an address in Louisiana. The applicant claims non-dutiable treatment for this item, citing 19 U.S.C. 1466(h).

ISSUES:

Whether the work described in the FACTS portion of this ruling is dutiable under the vessel repair statute (19 U.S.C. 1466).

LAW AND ANALYSIS:

Initially we note that the vessel repair entry and the application for relief in this matter were timely filed (see 19

Under 19 U.S.C. 1466:

The equipments, or any part thereof ... purchased for, or the repair parts or materials to be used, or the expenses of repairs made in a foreign country upon a vessel documented under the laws of the United States to engage in the foreign or coasting trade, or a vessel intended to be employed in such trade, shall, on the first arrival of such vessel in any port of the United States, be liable to entry and the payment of an ad valorem duty of 50 per centum on the cost thereof in such foreign country.

Section 1466 also provides, generally, for remission or refund of such duties if it is established that the purchases or repairs were compelled by stress of weather or other casualty, that the equipments or repairs were manufactured or produced in the United States and the labor necessary to install them or make the repairs was performed by United States residents or members of the regular crew of the vessel, or that the equipments or materials or labor were used as dunnage for cargo, or similar purposes. In addition, section 1466 provides for the exemption from vessel repair duties for certain materials with respect to a vessel which arrives in a United States port two years or more after its last departure from a United States port, and for certain materials for LASH (Lighter Aboard Ship) barges, or certain spare parts or materials subject to various specified conditions. The Customs Regulations issued under section 1466 are found in 19 CFR 4.14.

The Customs Service has issued many rulings applying and interpreting 19 U.S.C. 1466. See, e.g., HQ 112851, dated March 22, 1996, copy enclosed. Ruling HQ 112851, includes statements of the general rules for the determination of what are modifications to the hull and fittings of a vessel (held not to be dutiable under section 1466), and the dutiability under section 1466 of the cost of inspections or surveys done by the American Bureau of Shipping (ABS). In regard to surveys or inspections, the general rule is that a survey undertaken to meet the specific requirements of a governmental entity, classification society, or insurance carrier is not dutiable even when dutiable repairs are effected as a result of a survey. When an inspection or survey is conducted to ascertain the extent of damages sustained, whether repairs are necessary, or to inspect repairs made, the costs are dutiable as part of the repairs which are accomplished. The LAW AND ANALYSIS portion of ruling HQ 112851 is incorporated by reference into this ruling, in regard to its description of the interpretation of this issue (i.e., the dutiability of surveys or inspections of a vessel).

Insofar as cleaning operations are concerned, Customs has held that cleaning operations which remove rust and deterioration or worn parts, and which are a necessary factor in the effective restoration of a vessel to its former state of preservation, constitute vessel repairs. Analogous to Customs position regarding the dutiability of surveys, Customs has long held that the cost of cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel (see C.I.E.'s 18/48; 125/48; 910/59; 820/60; 51/61; 569/62; and 698/62).

Also pertinent in this case are Customs positions regarding the segregation of dutiable and non-dutiable costs and the dutiability of accessing work. Pursuant to C.I.E. 1325/58 and C.I.E. 565/55, duties may not be remitted where the invoice does not segregate the dutiable costs from the non-dutiable costs. Where accessing work is integral to dutiable repairs, the accessing work is also dutiable (see HQ ruling 108366).

Insofar as the applicability of 19 U.S.C. 1466(d)(2) is concerned, that provision provides for remission or refund of vessel repair duties "[i]f the owner or master ... furnishes good and sufficient evidence that ... such equipments or parts thereof or repair parts or materials, were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel ...." As you note, this provision was interpreted by Treasury Decision (T.D.) 75-257. Under T.D. 75-257, when material of United States manufacture is purchased by the vessel owner in the United States for installation abroad by foreign labor, the labor cost alone is subject to duty under section 1466 and the material is free of duty (see, e.g., ruling HQ 112756). This remains Customs position (see, e.g., rulings HQ 110741 and 112756).

We note that this treatment is consistent with the Customs treatment of certain foreign-manufactured vessel parts, under 19 U.S.C. 1466(h). Customs has stated that these provisions (i.e., 19 U.S.C. 1466(d) and 1466(h)) will be accorded uniform treatment (see, e.g., rulings HQ 111692 (concerning the same vessel as is involved in this case) and HQ 112066). In regard to section 1466(h), we note that section 1466(h) expired on December 31, 1992, and again became effective on January 1, 1995 (i.e., section 1466(h) was ineffective as to vessel repair entries in the intervening period). Since the entry under consideration was during the intervening period, section 1466(h) is inapplicable to the entry under consideration.

(As for the possible applicability of the decision in Texaco Marine Services, Inc. v. United States, 44 F. 3d 1539 (Fed. Cir. 1994), to surveys or inspections (see above), we note that, except for post-repair cleaning and protective coverings, the decision in that case will not apply to vessel repair entries filed prior to the date of that decision (December 29, 1994). Since the vessel repair entry under consideration was filed prior to that date, Texaco would not affect Customs position regarding surveys in the entry under consideration.)

The items about which you request advice are item 103, 104, 330, ABS "dry-docking" survey, and 5423661. In the case of item 103, although this is a survey, we note that among the work described in the invoice is "renewing any defective fastenings". This is a dutiable repair (see, e.g., ruling HQ 112894, in which we ruled that the renewal of missing or defective studs and nuts was dutiable). Therefore, the opening and closing for survey portion and the cleaning by scraping portion of this item are dutiable, as cleaning operations and accessing work in preparation for or in conjunction with dutiable repairs (see above). The costs for staging are non-dutiable, as segregated staging costs (see C.I.E. 1822/58).

In the case of item 104, we note that the applicant does not seek relief for this item. We are concerned that this item may represent preparatory work for dutiable repairs and cleaning operations after repairs (i.e., the work is described as "anodes covered with grease for protection [and] [g]rease cleaned on completion"). We note the repairs described in invoice items 110 and 111 (hull cleaning and surface preparation and hull painting) and the references to protection of anodes against blasting and painting in the Wilson Walton invoice. In view of this evidence, and in the absence of any explanatory evidence, this item is dutiable.

The applicant also did not seek relief for item 330. In this case, however, we agree with your recommendation that the item be treated as non-dutiable. The only possible indication that this item included repair is the reference to installing manhole covers with new gaskets. Customs has long ruled, consistent with the decision in American Viking Corp. v. United States, 37 Cust. Ct. 237, 247, C.D. 1830 (1956), that articles necessarily destroyed in the course of opening an area for inspection may be replaced without duty consequence if no otherwise dutiable repair accompanies the operation (see, e.g., rulings HQ 109349 and HQ 112507). In the former of the cited rulings, we stated about this rule that "[it] is normally applied to seals, gaskets, and the like." We have previously held the work described in item 330 to be non-dutiable (see, e.g., ruling HQ 112454). This item is non-dutiable.

In the case of the "dry-docking" survey, as stated above, the costs of the "repairs" survey are segregated from the costs of the other surveys. There is no evidence that any of the other surveys were performed to ascertain the extent of damages sustained, whether repairs were necessary, or to inspect repairs made. Therefore, in accordance with the above described Customs positions on surveys and the segregation of dutiable and non-dutiable costs, the costs for the "repairs" survey are dutiable and the costs for the remaining surveys in the "dry-docking" survey are non-dutiable (see, e.g., rulings HQ 112871 and 112851 for similar treatment of such surveys).

In the case of item 5423661, an invoice is provided for the materials for which non-dutiable treatment is claimed by the vessel operator under 19 U.S.C. 1466(h). As noted above, section 1466(h) is inapplicable to this entry (because the vessel repair entry under consideration was filed during the interval when that provision was ineffective (see above)). Insofar as the applicability of 19 U.S.C. 1466(d) is concerned (you requested our advice on the applicability of that provision), under T.D. 75-257 and the rulings discussed above, the materials covered in invoice 5423661 may be accorded non-dutiable treatment, provided that "good and sufficient" evidence is provided that the materials were manufactured or produced in the United States. The only evidence in the file in this regard is the invoice. Since such evidence, by itself, does not establish that the materials were manufactured or produced in the United States (i.e., the materials could have been manufactured or produced elsewhere and imported by the company which sold them to the vessel operator), this item is dutiable, unless the applicant provides such "good and sufficient" evidence (e.g., a letter signed by a responsible official of the company which sold the materials to the vessel operator that all of the materials (specifically referencing invoice 5423661) were manufactured by the company in the United States (see ruling HQ 111309)).

HOLDING:

Among the items about which you requested advice, items 103 (staging only) and 330, the "dry-docking" survey (except for the "repairs" survey), and item 5423661 (provided that the vessel operator supplies "good and sufficient" evidence, as described in the FACTS AND ANALYSIS portion of this ruling, that the materials were manufactured or produced in the United States) are NON-DUTIABLE. Items 103 (portions other than staging) and 104, the "dry-docking" survey ("repairs" survey only), and item 5423661 (if no "good and sufficient" evidence, as described in the FACTS AND ANALYSIS portion of this ruling, is supplied that the materials were manufactured or produced in the United States) are DUTIABLE.

Sincerely,

William G. Rosoff Chief

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